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FRE 501 2013 Lab 2

FRE 501 2013 Lab 2. Game Preparation. Mission Statement (refined). Understand how commodity futures markets work, Formulate and refine trading and hedging strategies, Learn and practice risk management, I n preparation for future professional roles. Agenda. Background Reading

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FRE 501 2013 Lab 2

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  1. FRE 501 2013Lab 2 Game Preparation

  2. Mission Statement (refined) Understand how commodity futures markets work, Formulate and refine trading and hedging strategies, Learn and practice risk management, In preparation for future professional roles

  3. Agenda • Background Reading • Contract Specifics • Futures Curves • Basic commodity relationships • What to look out for

  4. Background Reading The Origin of Futures Markets: An MFRE Tale Questions? Additional Resources: • Lecture by Robert Shiller on Forwards vs Futures http://oyc.yale.edu/economics/econ-252-11/lecture-15

  5. Commodities we will trade • Corn (Maize) • Wheat • Soybeans (those who would like a greater challenge can trade the sub-products: soybean meal / oil) In stocktrak, go to: Trading->Futures->United States->Grains and Oil SeedsYour accounts will allow you to trade only U.S. futures

  6. Contract Specifications Margin: A cash deposit you place with the exchange as a guarantee (read “An MFRE Tale”) Initial Margin: The amount of deposit you need in order to initiate the trade Maintenance Margin: The threshold amount before the exchange starts asking you for more money

  7. Reality vs. Game Differences Margin: Other differences: • Trading months • Liquidity, Bid/Asks But still very much sufficient for our learning purposes

  8. Futures Curves Which Contracts to trade

  9. Futures Curves There are many prices for a commodity Each point represents a futures contract for delivery in that month

  10. Futures Curves Time Series usually refer to just spot price or, 1st nearby price

  11. Month Codes for futures contracts

  12. Which contract to trade Focus on trading the nearby months: • They are the most volatile and sensitive to supply/demand shocks • In reality, they are also the most liquid (most market participants here, highest volume) • Don’t trade the Sep 2013 contract – won’t have to worry about rolling contracts

  13. My spread trade in 2012 http://blogs.ubc.ca/mliew/2012/10/25/curve-flattener-spread-trade/ Droughts last year. Nearby prices had to be high to ration demand Start Balance: 40k Spread Trade End of Game : +15k Till today: +25k

  14. Basic Relationships

  15. Corn and Soybeans are production substitutes You can figure out price implications on your own – that’s the fun part! Ariel can tell us all about Corn CORN SOYBEANS

  16. Wheat – best left to Canadians Brendan can tell us about wheat

  17. Demand Side • Corn and Wheat are demand substitutes, in both human feed and animal feed • Corn and Soybeans are also demand substitutes – oil and protein • Corn-ethanol and soybean methyl ester (biodiesel) linked through energy markets and biofuel policies • Remaining protein are substitutes in animal feed You can do the historical price charts and correlations yourselves to see the relationships

  18. Source: Barry Bannister

  19. Energy Price is the leader Why does the price of energy lead all other commodities? Everything we harvest from the planet requires energy. If energy were infinitely cheap, it would be possible to convert a mountain into pure elements for no cost. All commodity prices would move toward zero. Food still requires other inputs (biological and chemical transformation in addition to mechanical transformation) but modern day ag. production is highly energy intensive

  20. Some Things to watch • Supply • Crop reports, weather reports, planting • Competitor production, planting • Demand • Import Demand (e.g. BRIC countries) • Biofuel Regulations • Crude Oil price • Macroeconomic / Political Events: • FX and Bond markets go first • Energy and Industrials next • Soft commodities usually go last, but biofuel has tightened the relationship • Equity (Stock) markets are temperamental

  21. Keeping an Eye on: I don’t watch TV anymore • Palm futures curve • USD-MYR forward rates • Soybean Oil (CBOT) , Dalian Refined Palm Olein • Energy (Crude, coal, nat gas), FX markets, Major equity markets • U.S. 10 year bonds, Major Bank CDS

  22. USDA crop report on the 12th http://www.fas.usda.gov/cmp/circular_schedule.asp Expect heavy volume of trading just before and just after the announcement, as markets adjust to new information. I’m gonna blog about this A+

  23. Economic Calendars Yahoo Economic Calendar: http://biz.yahoo.com/c/ec/201338.html Bloomberg Economic Calendar: http://www.bloomberg.com/markets/economic-calendar/ CME Economic Calendar: http://www.cmegroup.com/education/econ_calendar.html So many interesting things happening in the world

  24. Where to Click in Stocktrak

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